Show Me the Money: Investment and the UK’s Net-Zero Strategy

UK Policy Net Zero

Show Me the Money: Investment and the UK’s Net-Zero Strategy

Posted on: 22nd October 2021
Tim Lord
Associate Senior Fellow | Net Zero

The government’s Net Zero Strategy is a big step forward – but we need more clarity on how investment will be delivered

The government’s Net Zero Strategy, published this week, aims to set a pathway not just to net zero emissions by 2050, but to the even more challenging goals of cutting emissions by around 40% on current levels by 2030, and 68% by 2035.

To give a sense of scale: in 2019, total emissions from the UK were estimated at 522 million tonnes (Mt) of CO2 equivalent.  By 2030 – just 11 years later – they must fall to just 316Mt.  By comparison, when our emissions were rising through the 19th and 20th century, they first hit 316Mt in 1883.  It wasn’t until 1951 – 68 years later – that they reached 522Mt.

So the emissions cuts we need to achieve in 11 years are equivalent to emissions growth which took 68.

Achieving that level and pace of emission reduction is a huge task. While there are many components to it, including public behaviour change (much as the government might like to ignore it), it is above all an investment challenge.

The Net Zero Strategy acknowledges the need for investment, but it’s only if you make it to page 328 that you get a full sense of the scale.  That says that, in this decade alone, we need £335 billion of additional investment to put us on a path to meeting our targets.

Source: Net Zero Strategy, pg 328

And while there’s no way of arguing that £335 billion, or over £30 billion a year, is a small sum of money, apocalyptic warnings that it will collapse the economy are off the mark. In fact, it’s comfortably less than we spend on defence each year.

Of that £335 billion, the largest chunk – £97 billion – is required to accelerate the decarbonisation of our buildings.  The vast majority of that will need to be invested in energy efficiency and low carbon heating in our homes. Again, a large amount of money – but the annual requirement is less than a fifth of what UK homeowners are estimated to have spent on home improvements in 2020.

So while the challenge is big, it is not insurmountable.  But this investment will not just flow because the government wills it – action is needed, not just words.

Where’s the money coming from?

Which brings us to the government’s plan.  Their strategic proposition is to deliver this money through limited public funding, which will prime the pump for a deluge of private sector cash to fund the rest.

There’s plenty of sense in that, but there are also two problems: is the public money enough to get markets going?; and are the market and regulatory frameworks in place to incentivise private capital to flow?

Public funding is insufficient

Is the commitment of public money sufficient? Almost certainly not. If we use the buildings example: the government has committed, in total, £6.3 billion of public money between 2020 and 2025. That’s less than 7% of the spending that the government itself says is required.  While the government is rightly keen that public sector money draws in private sector investors, a 93% gap is implausibly large. 

Given the scale of the challenge, it’s fair to ask why public investment is so low.  The answer lies in one of the panoply of documents published alongside the Net Zero Strategy – HM Treasury’s “Net Zero Review”.  That states that expenditure on net zero should not be funded by state borrowing, because “seeking to pass the costs on to future taxpayers through borrowing would not be consistent with intergenerational fairness nor fiscal sustainability”.

This argument is worth unpacking. The government has three choices for public investment in net zero: fund it through taxation; fund it through borrowing; or do not fund it adequately.  The Treasury appears to have rejected the first and second options, leaving us with the third.

But why rule out funding at least part of the required investment through borrowing?  The whole rationale for net zero investment is that high upfront costs will deliver much larger long-term benefits for future generations. 

If we take action, future generations will be richer than ours and therefore more able to afford to share the burden.  Since the taxpayers of the past as well as the present have created the problem, and taxpayers of the future will benefit from the solution, how can it be justified for all the transition costs to fall now?

More broadly, if spending of this kind is not suitable for borrowing, it undermines the case for almost any long-term borrowing.  Why is it appropriate for future generations to pay for day-to-day spending, or for borrowing related to the coronavirus pandemic, but not for climate change? If we follow this argument, the costs of WW2 – which were not fully repaid until 2006 – should have been met by general taxation during the war years. They were not, and rightly, because the assessment was that short-term borrowing was justified because of the long-term benefits.  The same argument applies here.

Market-based incentives need to be put in place – and fast

The second problem with the government’s approach is that a heavy reliance on private sector investment requires the incentives which will bring that investment forward to be in place. 

But when we look at the key areas where money needs to flow – renewables, nuclear, CCS, low carbon hydrogen, heat pumps, energy efficiency, bioenergy – the vast majority do not have investable business models.  If you want to build a CCUS facility, you need to know the carbon you capture and store will have sufficient value to justify an investment. And if you are going to install a heat pump, you need assurance that the running costs for your heating will not increase. While there are promises of jam tomorrow in many of these areas, firm propositions are not in place.

Without those investable business models, supported market frameworks which incentivise a rapid shift of money away from high carbon and towards net zero, the required private sector investment simply will not happen. 

That is why it is essential that the government makes rapid progress on its proposals to extend and strengthen carbon pricing; to deliver an investable business model for CCUS and low carbon hydrogen; to rebalance the policy costs which make low carbon electricity more expensive than high carbon gas; and to undertake fundamental reform to energy markets so they are shaped around the low carbon technologies of the future, not the high carbon technologies of the past.

The opportunity in doing so is potentially huge – many (though not all) of these technologies are already cheaper than the high carbon alternatives, and by designing market and regulatory frameworks we can accelerate the investment we need for their delivery.

Only by taking that action – strengthening the level of publicly funded investment, and taking the tough choices which can incentivise the private sector – will we get anywhere close to delivering the investment we need at the pace required. And with only eight years to go to 2030, speed is of the essence.

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